Published: Wed, 18 Feb 2009 16:25:09 +0100

Mid-Morning Recap: Dow Flirting With One-Year Lows

(CEP News) - U.S. equities are losing ground on Wednesday following Tuesday's massive selloff. Investors doubt whether the U.S. stimulus plan is going to have any impact on the weakening economy, according to market strategists.

Traders are watching the Nov. 21 low in the Dow Jones Industrial Average very closely, with the index only about 50 points away from testing it.

The Dow Jones industrial average is down 62 points to 7491, the S&P 500 is down 7 points to 782 and the Nasdaq is down 12 points to 1459. Canadian stocks are also weaker, with Toronto's S&P/TSX composite index down 207 points to 8172.

U.S. equity markets received a modest boost following media reports regarding the U.S. government's housing plan, which President Barack Obama will officially release shortly after noon EST.

The Obama administration said the mortgage plan will boost confidence by creating lower mortgage rates and will allow refinancing for four to five million homeowners and assist another three to four million "hard pressed" homeowners.

As part of the plan, the U.S. Treasury will increase its purchases of Fannie and Freddie stock by up to $400 billion, or $200 billion each - double the original level. The Treasury will also boost its purchase of Fannie and Freddie's mortgage portfolios by $50 million each to $900 billion.

U.S. and Canadian data have not provided much direction for markets this morning. Markets ignored Canadian wholesale sales, which fell 3.4% in December. The decrease was the largest month-over-month drop since August 2003 and was substantially larger than the 2.0% drop expected by analysts.

Markets also shrugged off more dire data in the U.S. housing market. U.S. housing starts fell to an annualized pace of 466k, representing a month-over-month decrease of 16.8%, according to the U.S. Department of Commerce. The consensus was looking for January to show a decline to 529k. The previous month's reading was revised up to 560k from a previously reported 550k.

European stock markets closed with the Eurostoxx down 31 points to 1863, the UK FTSE 100 down 81 points to 3953 and the German DAX down 70 points to 4146.

Currency markets continue to track equities today and the overall theme is still for a stronger U.S. dollar. Currency strategists from Brown Brothers Harriman said any pullback in the U.S. dollar is a good buying opportunity.

"The underlying themes supporting the U.S. dollar have not disappeared," they said. "Markets remain concerned about the stresses created for European countries as they move to address the economic and financial crisis."

The Canadian dollar is up 0.0040 to 0.7926 against the U.S. dollar (1.2614 USD/CAD) and up 0.96 to 74.00 against the yen.

The U.S. dollar is up 0.95 to 93.36 against the yen and the Dollar Index is up 0.433 to 88.014.

The euro is down 0.0037 to 1.2546 against the U.S. dollar, down 0.0097 to 1.5825 against the Canadian dollar, up 0.0006 to 0.8842 against the pound sterling and is higher by 0.86 to 117.12 against the yen.

The pound sterling is down 0.0050 to 1.4189 against the U.S. dollar and down 0.0118 to 1.7900 against the Canadian dollar.

U.S. Treasury markets are relatively quiet ahead of the release of the minutes from the January FOMC interest rate meeting. Fixed income strategists are waiting to read the minutes to see if there are any more hints regarding the Fed's plan to purchase longer term Treasuries.

U.S. two-year yields are up 3.2 bps to 0.89%, with five-year yields up 3.3 bps to 1.69%, 10-year yields flat at 2.65% and 30-year yields down 4.5 bps to 3.43%. The Eurodollar September 09 contract is down 2.5 ticks to 98.64. The yield curve is flatter, with the 10/2-year spread down 3.5 bps to 175.18 bps.

The Canadian 10-year note is yielding 16.19 bps more than the U.S. 10-year note.

Yields on two-year Canadian government bonds are up 5.8 bps to 1.24%, with five-year yields up 3.0 bps to 2.04%, 10-year yields down 0.6 bps to 2.81% and 30-year yields down 3.5 bps to 3.53%. The September 09 BAX contract is down 7.0 ticks to 99.23.

In Germany, returns on two-year German bonds are up 2.4 bps to 1.19%, with five-year yields flat at 2.06%, 10-year yields down 1.5 bps to 2.96% and 30-year yields up 3.1 bps to 3.64%.

Yields on UK two-year bonds are up 7.2 bps to 1.43%, with five-year yields up 2.1 bps to 2.53%, 10-year yields down 5.3 bps to 3.36% and 30-year yields down 2.3 bps to 4.02%.

The fear sentiment continues to impact commodity markets. Traders appear to be taking some profits in gold after Tuesday's massive rally, whil oil prices are still under pressure.

WTI crude oil is up $0.25 to $35.18. The front month gold contract at the Chicago Board of Trade is down $4.60 to $966.20 per ounce.

All data taken at 10:15 a.m. EST

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca